BackMargins at Asian Paints may fade before impact of price hike shows
Dealer checks showed that other paint makers increased prices by around 2-3% much before Asian Paints did
PremiumAgainst the backdrop of rising cost pressures, investors in paint stocks were waiting for companies to raise prices. The market leader in the decorative paints segment Asian Paints Ltd has increased prices by around 2% effective 1 May, according to dealers. Usually, other paint companies follow Asian Paints when it comes to hiking prices. However, this time around, dealer checks showed that peers increased prices by around 2-3% much before Asian Paints did. Needless to say, price hikes bode well for the margins of the entire sector.
However, gross margins of Asian Paints are likely to take a hit before the impact of the price hikes begins to show. Analysts at Kotak Institutional Equities are pencilling in a gross margin contraction of 340 basis points (bps) on a year-on-year basis in the March quarter. One basis point is one hundredth of a percentage point. Sequentially, they foresee a decline of 260bps in gross margins. “Ebitda margin will correct significantly from all-time high levels witnessed in the December 2020 quarter," said the Kotak report on 6 April. Ebitda is short for earnings before interest, tax, depreciation and amortization. “Compared to Asian Paints, we sense a bit more comfort on margin for Berger Paints, owing to low-cost inventory, and renegotiated raw material contracts," it added.
Prices of key inputs such as crude-based monomers and titanium dioxide have been on an upswing in the recent months. From their post-covid lows, prices have more than doubled. Analysts also point out that prices of packing material have increased by around 25% in recent months. It should be noted that paint makers usually tend to pass on the burden of increased costs to end users.
“Surprisingly, demand has held up well for the sector, dealer checks are pointing to yet another quarter of more than 20% plus volume growth for decorative paints. With strong demand and cost inflation, there was anxiety among investors about the delay in price hikes by Asian Paints. So, this is sentimentally positive, but it will take time to reflect in earnings," said an analyst with a domestic brokerage house requesting anonymity. But this may not be enough to tackle the cost pressure. Analysts at Jefferies India Pvt. Ltd are of the view that Asian Paints would need a 4-5% price hike to offset a margin decline. Meanwhile, Asian Paints is expected to report robust volumes in Q4FY21. Analysts are also expecting the company to have gained more market share from the unorganized sector. Still, they find the stock’s valuations stretched. “Asian Paints trades at 70 times FY22E price-to-earnings, at a premium to the historical average and leaves little room for error," said the Jefferies report dated 1 April.
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